Today’s Decisions, Tomorrow’s Success
Among the hustle and bustle of daily life, and a running to-do list of time sensitive tasks that need to be completed, financial planning and estate planning might become low on the priority list. But when it comes to preparing for the future, there is no time like the present.
For families with dependent children, planning for the future with an estate plan, which includes a solid financial blueprint, becomes even more important.
Estate Planning
“Estate planning is a term that gets thrown around, and many people are unfamiliar with it or have misconceptions about it,” says Nathan Jones, an attorney at Jones & Ueligger Law. “A lot of people who might not be familiar think it is meant for rich people to plan out their estate, and they conjure up these visions of people with mansions, but really, it’s a plan that says if something were to happen, this is where I want my assets to go, and who I want to be in charge of them.”
When creating an estate plan, Nathan says there are typically three main goals — making sure wills and trusts take care of the kids, avoiding probate (i.e., a court process that is triggered when the proper planning isn’t in place), and formalizing power of attorney documents that address financial and healthcare matters.
Wills
A will is how parents name a guardian for their kids. Having a will in place is the only way to prepare for the unexpected, because once a will becomes necessary, it is too late to create one.
“For families with young kids, it’s especially important to plan because it is the opportunity for parents to exercise their rights as to who would become the guardian of their kids should something happen,” Nathan says.
Often, people with young kids name their own parents as guardians in their will. Nathan suggests that a good estate plan will include at least one backup, which is often a much harder choice.
“You might have an idea of who you want to be the guardian, but you don’t consider what happens if the first choice can’t do it,” Nathan says. “In five or 10 years, parents could be dealing with health issues of their own, so it might become necessary to revisit the guardian decision,” he says.
Trusts
A trust formalizes how kids, or other beneficiaries, inherit money. The need for a trust is less about how much money you have and more about protecting beneficiaries while accomplishing the goals you have in mind, Nathan says.
“To what degree are you comfortable with your kids inheriting your money at 18 if something happens to you,” Nathan says. “Without a plan in place, your kids get your money at 18. A trust prevents someone else from getting your money besides your kids, but also prevents the money from being dumped in their laps and it going poof.”
A trust should be revisited as you accumulate wealth over the years.
“It is important to revisit these documents every 3-5 years because these types of documents are amendable and they are designed to be updated over time as life goes on,” Nathan says. “It’s your kids and your assets that you’ve been working for your whole life, and it’s worth making sure it’s done right.”
Power of Attorney
While wills and trusts become important upon death, a power of attorney accounts for things that can happen during your lifetime. Most power of attorney documents cover financial matters, but a power of attorney also covers matters related to healthcare.
“A power attorney says that is I’m in an accident or have a health event, or if something is preventing me from making decisions and speaking on my own behalf, this is who I want to do that for me,” Nathan says.
As each of these documents are legal documents that must be valid in the state of Missouri, Nathan says it is best to create them with an attorney who focuses their practice on estate planning.
Financial Planning
Creating a financial plan means that you’re planning for your financial health today, be it 10 years down the line, during retirement, and after death. Before you can consider any of that, you have to start with a budget.
“Before you can do any planning, you have to have a plan for the money you’re making before it hits your checking account,” says Polly Reynolds, senior vice president and trust officer at The Trust Company. “If you don’t have a solid picture of the money that’s coming in and the money that’s going out, that’s not a plan.”
When you have a family, financial planning includes things like college, weddings and retirement, as well as other things that may be coming down the road.
“People put this off, but it is never too late to take the next right step forward, to do the right thing,” Polly says. “The goals are different for everybody, but there are basic needs, wants and wishes.”
While some families might be working towards home ownership, others might be planning for a vacation home, or planning to tithe money to different charities. No matter the goal, a financial plan prepares you to get from point A to point B. Based on your goals, a financial planner can help determine how to invest assets to meet those goals.
“The decisions you make about your financial plan today will determine how successful you are tomorrow,” Polly says. “We call it financial planning instead of a financial plan, because nothing remains static. Your income changes, what you’re putting into your 401(k) changes, so we meet with clients every year to update it.”
Emergency Fund
Emergency funds are a crucial component of financial planning.
“If you have a stable income, your emergency fund should be three months of expenses, which is very different than income,” Polly says. “If you’re in sales where your income fluctuates, you should have six months of expenses set aside.”
Emergency funds should be saved in a money market savings account rather than invested in the stock market. Although the savings account doesn’t pay much interest, the money should be easily accessible.
“You don’t want that in the market because if you need it in an emergency and the market is down, you’ll sell it at a loss,” Polly says. “You don’t want to be forced to take money out of your investments when they’re low because it is very difficult to recover from those realized losses.”
Most importantly, if you take money out of your emergency funds, Polly says you have to replenish the account until it is built back up.
Insurance
When you have dependents relying on you to provide for them with your income, insurance is another key component of financial planning.
“I recommend term-life insurance for younger families to make sure if something happens to a parent, there will be money to help continue to raise the children and get them through college,” Polly says. “If one parent stays home, people ask why they would need to have life insurance since that parent isn’t earning an income. A surviving parent has to pay someone for everything that parent was doing — laundry, meals, all the services the stay-at-home parent provides. You can’t assume that because you don’t have an income, you don’t need life insurance.”
Financial Planning for Kids
It’s never too early to teach kids about money, and teaching kids how to save and spend responsibly is a skill that will stay with them throughout life.
“We are in a credit card culture, and everyone wants immediate gratification,” Polly says. “People are swamped with credit card debt at very high interest rates and that is very hard to get out of.”
If a kid wants a new skateboard, Polly suggests helping them slowly put money aside. This approach helps teach them that when they want something, they should save for it.
If a kid wants to earn money by doing tasks around the house, Polly suggests having a conversation about their plans for the money. One effective approach is encouraging kids to give some money to a charity, save half and spend half of what’s left.
“This shows them from an early age how they can plan and save for things they want.”